By Roger J Kerr
Holding a clear and firm view on where the Kiwi dollar is travelling in the short term is nigh impossible currently with the markets reverting to wild and large daily swings of up to two cents against the USD.
The increase in NZD forex market volatility over the last two weeks due to the European and global share market gyrations certainly tells us that risk levels are substantially higher, thus currency movements far less predictable and uncertain.
Local exporters, who pro-actively manage their FX risk within defined hedging policies and strategies, have seen the benefit of staggering into higher levels of forward cover from 0.6800 down to 0.6600 entry levels.
Standing back from the day-to-day market movements, the drivers of the NZD/USD exchange rate continues to be the AUD/USD rate, the EUR/USD rate, relative interest rate levels, commodity prices and economic news/developments.
The AUD is undergoing a much needed correction and consolidation after the dramatic fall from 0.9300 to 0.8200 against the USD. The EUR sell-off is also in a pause mode.
However it will only take some more negative news out of Europe and resultant share market selling to reverse the recent upward corrections and send the Kiwi dollar south again.
If the wild international market volatility continues over the next 10-days, the RBNZ may do the prudent thing and delay their expected 0.25% OCR increase.
That would be negative for the Kiwi; however it would be falling anyway if the Dow Jones Index was being sold off again.
A push below $1.2000 in the EUR/USD rate on further deterioration in Europe would send the Kiwi and Aussie dollars lower. I cannot see how or why the European news would improve in the short-term; therefore I have to support a higher probability of the Kiwi heading back to 0.6600 over coming weeks rather than returning to 0.7000.
* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.